FISCAL POLICY

1. Allocation:
The provision for social goods, or the process by which total resource use is divided between private and
social goods and by which the mix of social goods is chosen. This provision may be termed as the
allocation function of budget policy. Social goods, as distinct from private goods, cannot be provided for
through the market system.
The basic reasons for the market failure in the provision of social goods are: firstly, because consumption
of such products by individuals is non rival, in the sense that one persons partaking of benefits does not
reduce the benefits available to others.
The benefits of social goods are externalised. Secondly, the exclusion principle is not feasible in the case
of social goods. The application of exclusion is frequently impossible or prohibitively expensive. So, the
social goods are to be provided by the government.
2. Distribution:
Adjustment of the distribution of income and wealth to assure conformance with what society considers a
fair or just state of distribution. The distribution of income and wealth determined by the market forces
and laws of inheritance involve a substantial degree of inequality. Tax transfer policies of the government
play an important role in reducing the inequalities in income and wealth in the economy.
3. Stabilization:
Fiscal policy is needed for stabilization, since full employment and price level stability do not come about
automatically in a market economy. Without it the economy tends to be subject to substantial fluctuations,
and it may suffer from sustained periods of unemployment or inflation. Unemployment and inflation may
exist at the same time. Such a situation is known as stagflation.
The overall level of employment and prices in the economy depends upon the level of aggregate demand,
relative to the potential or capacity output valued at prevailing prices. Government expenditures add to
total demand, while taxes reduce it. This suggests that budgetary effects on demand increase as the level
of expenditure increases and as the level of tax revenue decreases.
4. Economic Growth:
Moreover, the problem is not only one of maintaining high employment or of curtailing inflation within a
given level of capacity output. The effects of fiscal policy upon the rate of growth of potential output
must also be allowed for. Fiscal policy may affect the rate of saving and the willingness to invest and may
thereby influence the rate of capital formation.
Capital formation in turn affects productivity growth, so that fiscal policy is a significant factor in
economic growth.

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FISCAL POLICY
Meaning
The word fisc means state treasury and fiscal policy refers to policy concerning the use of
state treasury or the govt. finances to achieve the macroeconomic goals.
any decision to change the level, composition or timing of govt. expenditure or to vary the
burden ,the structure or frequency of the tax payment is fiscal policy. - G.K. Shaw
The fiscal policy is concerned with the raising of government revenue and incurring of
government expenditure.
Objectives of Fiscal Policy
1.
2.
3.
4.
5.
6.
7.

Development by effective Mobilisation of Resources.

Efficient allocation of Financial Resources
Reduction in inequalities of Income and Wealth
Price Stability and Control of Inflation
Employment Generation
Capital Formation
Development of Infrastructure

THREE MAIN STANCES OF FISCAL POLICY

NEUTRAL STANCE: This results in large tax revenue Government. Spending is fully funded
by Tax revenues and overall budget has a neutral effect on level of economic activity.
EXPANSIONARY STANCE: government expenditure is more than taxes receipts
CONTRATIONARY STANCE: Government expenditure is less than the taxes and revenues
received.

FUNDING
The expenditure of government can be funded in different ways :
1.
2.
3.
4.

Taxation
Borrowing
Consumption fiscal reserves
Sale of fixed assets.

Instruments of Fiscal Policy

1.
2.
3.
4.

Budgetary surplus and deficit

Government expenditure
Taxation- direct and indirect
Public debt

Budgetary surplus and deficit

1. A budget is a detailed plan of operations for some specific future period
2. An accumulated deficit over several years (or centuries) is referred to as the government
debt
3. A deficit is a flow. And a debt is a stock. Debt is essentially an accumulated flow of
deficits

Government Expenditure
It includes :
1.
2.
3.
4.

Government spending on the purchase of goods & services.

Payment of wages and salaries of government servants
Public investment
Transfer payments

Taxation
Meaning : Non quid pro quo transfer of private income to public coffers by means of taxes.
Classified into
1. Direct taxes- Corporate tax, Tax, Personal Income Tax, Fringe Benefit taxes, Banking
Cash Transaction Tax
2. Indirect taxes- Central Sales Tax, Customs, Service Tax, excise duty.

Public debt
Internal borrowings
1. Borrowings from the public by means of treasury bills and govt. bonds
2. Borrowings from the central bank ( monetized deficit financing)
External borrowings
1. foreign investments
2. international organizations like World Bank & IMF

3. market borrowings

BUDGET
1. A budget is a detailed plan of operations for some specific future period
2. It is an estimate prepared in advance of the period to which it applies.
3. It is also known as Annual Financial Statement of the year.

TWO TYPES OF BUDGET IN INDIA

1. UNION BUDGET
2. STATE BUDGET
UNION BUDGET
All the receipt and disbursements are kept under two headings.
1. Consolidated fund of India ( CFOI )
2. Public account of India ( PAOI )
CFOI

All revenue receive, loans raised and money received in repayment of loans by union
government.
No money can be withdrawn from this fund except under the authority of an Act of
parliament.

PAOI

All other receipts and disbursement of union government such as deposits, service funds
and remittances
It is not subject to vote of parliament.

STATE BUDGET
1. Estimates of receipts and expenditure are presented by State Government to their
Legislature before the beginning of the financial year
2. As in the case of union budget, there is a consolidated Fund, a public Account and a
Contingency Fund for each State.